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limited to, the identification of services

participated for any 3 (whether or not

the measurement of gain or loss under

performed over a period of time and the

consecutive) preceding tax years.

the passive activity rules. Whether

approximate number of hours spent

activities make up an appropriate

An activity is a personal service activity

performing the services during that

economic unit depends on all the relevant

if it involves the performance of personal

period, based on appointment books,

facts and circumstances. The factors

services in the fields of health, law,

calendars, or narrative summaries.

given the greatest weight in determining

engineering, architecture, accounting,

whether activities make up an appropriate

actuarial science, performing arts or

Tests for investors. Work done as an

economic unit are:

consulting in any other trade or business

investor in an activity is not treated as

in which capital is not a material

1. Similarities and differences in types

participation unless the individual was

income-producing factor.

of trades or businesses,

directly involved in the day-to-day

7. Based on all the facts and

2. The extent of common control,

management or operations of the activity.

circumstances, the individual participated

3. The extent of common ownership,

For purposes of this test, work done as an

in the activity on a regular, continuous,

4. Geographical location, and

investor includes:

and substantial basis during the tax year.

5. Reliance between or among the

1. Studying and reviewing financial

activities.

The individual did not materially

statements or reports on operations of the

participate in the activity under this

activity.

Example. The corporation has a

seventh test, however, if the individual

2. Preparing or compiling summaries

significant ownership interest in a bakery

participated in the activity for 100 hours or

or analyses of the finances or operations

and a movie theater in Baltimore and in a

less during the tax year. Participation in

of the activity for the individual’s own use.

bakery and a movie theater in

managing the activity does not count in

3. Monitoring the finances or

Philadelphia. Depending on all the

determining whether the individual

operations of the activity in a

relevant facts and circumstances, there

materially participated under the test if:

nonmanagerial capacity.

may be more than one reasonable

a. Any person (except that individual)

method for grouping the activities. For

If the individual is married for the tax

received compensation for performing

instance, the following groupings may or

year, the individual’s participation in an

services in the management of the activity

may not be permissible:

activity includes any participation in the

•

A single activity,

activity during the tax year by that

•

b. Any person in the activity spent

A movie theater activity and a bakery

individual’s spouse, whether or not the

more hours during the tax year than that

activity,

spouse owned any interest in the activity

•

individual spent performing services in the

A Baltimore activity and a Philadelphia

and whether or not the individual and

management of the activity (regardless of

activity, or

spouse file a joint return for the tax year.

•

whether the individual was compensated

Four separate activities.

Tests for individuals. An individual

for the management services).

Once the corporation chooses a

would materially participate in an activity

grouping under these rules, it must

Special rules for limited partners.

of the corporation if one or more of the

continue using that grouping in later tax

Generally, a limited partner cannot

following tests are satisfied.

years unless a material change in the

materially participate in an activity.

1. The individual participated in the

facts and circumstances makes it clearly

However, the corporation is considered to

activity for more than 500 hours.

inappropriate.

materially participate in an activity in

2. The individual’s participation in the

The IRS may regroup the activities if

which it holds a limited partner interest if

activity for the tax year was substantially

the grouping fails to reflect one or more

one or more individuals, each of whom

all of the participation in the activity of all

appropriate economic units and one of

would materially participate in the activity

individuals (including individuals who did

the primary purposes of the grouping is to

under test 1, 5, or 6 for the tax year if the

not own any interest in the corporation or

avoid the passive activity limitations.

corporation’s activity were the individual’s

the activity) for the year.

activity, directly or indirectly, own more

Limitation on grouping certain

3. The individual participated in the

than 50% (by value) of the corporation’s

activities. The following activities may

activity for more than 100 hours during

outstanding stock.

not be grouped together.

the tax year, and that individual

participated at least as much as any other

1. A rental activity with a trade or

The corporation is not treated as a

individual (including individuals who did

business activity unless the activities

limited partner, however, if the

not own any interest in the corporation or

being grouped together make up an

corporation was a general partner in the

the activity) for the year.

appropriate economic unit and

partnership at all times during the

4. The activity is a significant

partnership’s tax year ending with or

a. The rental activity is insubstantial

participation activity for the individual

within the corporation’s tax year (or, if

relative to the trade or business activity or

for the tax year, and the individual

shorter, during the portion of the

vice versa or

participated in all significant participation

partnership’s tax year in which the

b. Each owner of the trade or

activities during the year for more than

corporation directly or indirectly owned a

business activity has the same

500 hours. For this purpose, an

limited partner interest).

proportionate ownership interest in the

individual’s participation in all activities

rental activity. If so, the portion of the

A limited partner’s share of an electing

other than activities of the corporation is

rental activity involving the rental of

large partnership’s taxable income or loss

disregarded.

property used in the trade or business

and credits (including general business

A significant participation activity is any

activity may be grouped with the trade or

credits) from all trade or business and

trade or business activity in which the

business activity.

rental activities is treated as income or

individual participated for more than 100

2. An activity involving the rental of

loss from the conduct of a single passive

hours during the year and in which the

real property with an activity involving the

trade or business activity.

individual did not materially participate

rental of personal property (except

Consolidated groups. See Regulations

under any of the material participation

personal property provided in connection

section 1.469-1(h)(4) for rules for

tests (other than this fourth test). For

with the real property or vice versa).

determining whether a consolidated group

more information regarding significant

3. Any activity with another activity in

materially or significantly participates.

participation, see Pub. 925.

a different type of business and in which

5. The individual materially

the corporation holds an interest as a

Grouping of Activities

participated in the activity for any 5

limited partner or as a limited

(whether or not consecutive) of the 10

Generally, one or more trade or business

entrepreneur (as defined in section

immediately preceding tax years.

activities or rental activities may be

464(e)(2)) if that other activity engages in

6. The activity is a personal service

treated as a single activity if the activities

holding, producing, or distributing motion

activity in which the individual materially

make up an appropriate economic unit for

picture films or videotapes; farming;

-4-

Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2002 Page 4

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